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Potential contractor tax changes from HMRC - our official response

Ed Molyneux

In case you didn’t already know, HMRC have proposed some significant tax changes that could have a big impact on contractors working in the UK.

Essentially it boils down to this: the government believes that there should be a “level playing field” between employees and contractors who, on a day-to-day basis, “do the same job”. And, as a result, HMRC is seeking to prevent contractors who work through an intermediary - such as an umbrella company or personal service company - from claiming tax relief on travel between home and client sites in cases where the contractor’s work could be subject to “supervision, direction or control” by another party, such as one of the client’s staff or a project manager. If that all sounds complicated, check out this handy guide by our friends at IPSE that explains a lot of the detail.

These proposals would affect a huge number of UK contractors, and will have a major impact on the amount of tax they will have to pay in the future. But many of the organisations that work with contractors (including us) also have big concerns about how the proposals will actually be implemented.

We recently held a multi-organisational tax summit here at our Edinburgh HQ to discuss the proposed HMRC changes. Our panel included: Mark Beal-Preston (Managing Director - First Freelance), Neil Armitage (Operations Director - Umbrella), Adam Becker (Finance and Tax Director - Futurelink Group), Lorence Nye (Policy Advisor, Economics - IPSE) who joined us in sharing views about how the proposals will affect the UK’s contractor industry. We were also delighted to be joined by John Whiting, Tax Director of the Office of Tax Simplification and AccountingWEB’s Tax Policy Editor Rebecca Cave.

The discussions have helped form the basis for an official response from FreeAgent that we’ve now submitted to HMRC. Our other delegates will likely be submitting their own views too, but here’s our take on the issue.

We think the whole idea behind the proposals is fundamentally flawed. Although employees and contractors may “do the same job” on a day-to-day basis, contractors have a much higher business risk; they must find contracts, keep their own books, deal with payroll themselves, and are not entitled to sick pay, holiday pay or to employment benefits such as medical insurance. This additional risk must be balanced by additional reward, since small businesses and contractors are such a crucial part of the UK economy. So there doesn’t really need to be a “level playing field”.

The proposals will be hugely difficult to administer or adhere to. Freelance engagements change over their lifetimes, are often carried out concurrently and not all of them will be subject to the right of supervision, direction or control - so calculating what can and cannot be claimed from will be extremely confusing.

Many business owners may opt to trade as sole traders instead, with the inherent risk of the loss of limited liability and business credibility. But if they do this, they may also end up losing work - as engagers may refuse to accept contractors who are sole traders because they would then bear any liability imposed under IR35.

We believe that this approach will cause a great deal of confusion and uncertainty and would prefer an alternative approach such as allowing travel and subsistence claims for any home to work journeys longer than the national average. Otherwise genuine contractors will be dissuaded from accepting certain contracts and the flexible workforce will become less mobile.

We hope that HMRC will consider our response carefully, as we believe that the current proposals could be potentially damaging for contractors - and create a legislative nightmare for their accountants to deal with.

If you’re a contractor and you also have concerns we’d also recommend speaking to your accountant to get the full details about the proposals and how they may affect you. After that, you’ll have until the end of September to submit your own response to HMRC about the changes.

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